In the last few years, there has been a significant debate on what has caused America’s economic woes. However, few people choose to look at what has caused economic downturns in the past. Some believe that it is the government and central banking’s job to steer the economy in the right direction. While others believe that it is not their job, but the free market’s. Perhaps it is something in between as a symbiosis between government and the free market working together to get things done. Many questions should be asked such as: what is the history of money and banking in the United States? What has proven sustainable monetary policy and how all this either helped or harmed by government involvement? These are important questions on the future of the United States. In the words of John Maynard Keynes, “The ideas of economist both when they are right and when they are wrong are more powerful than commonly understood. Indeed the world is ruled by little else.”(Keynes, 2008) p247 The answer to those questions can be answered by research into this subject. As I answer those questions, I will also be able to answer the major question of: What has caused booms and busts in the past and how or can we prevent them?
What is the History of Money and Banking?
Before answering the major question, the history of money and banking must be discussed. It starts with the Colonial era and ends with the closing of World War II. The findings will help one understand the full picture. As F.A. Hayek quipped, “The curious task of economics is to prove to men how little they really know.” (Hayek, Fatal Conceit)
Colonial Era 1607-1762
The Colonial Era was a time of emerging economic development and intrusion by the British Parliament. In 1651, England passed the Navigation Acts. The Navigation Acts were a series of acts that subsidized various commodities and forced the British Colonies to only use and purchase English goods. It was a disastrous policy because it was based on a mercantilist1 ideology. It hurt their economy and caused unrest in the colonies.(Schweikart, 2011) However, the prosperity that American had achieved by the Revolutionary could not have happened was it not for the protection of British military. Monetarily, England would not distribute coniage or allow the colonists to coin their own money. In 1652, there was no king; Oliver Cromwell was the Lord Protectorate. So in 1667, the colonists coined their own money in Massachusetts and called the Pine Tree Shilling since the pine tree was their leading export. They dated it at 1652 when there was no king to authorize it. It is believed they did this until 1674 (Smithsonian Institute, 2013). Thereby, circumventing the “federal government” at that time. There were very few banks during this era of American History. One called the Massachusetts Land Bank, which issued non-redeemable bank notes, based on land, ultimately the bank notes depreciated and then land banking was outlawed in 1741....